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Electronically signing corporate governance charter

hello welcome to the short video on corporate governance one of the four topics that we'll be looking at in the exam in January so corporate governance and why do you think about this find three minutes just to have a look at this YouTube video which explores the consequences of corporate failure so it's a compelling little argument for why we need corporate governance and look out for different consequences listed in that it's just a clip of pictures from newsreels and consequences of some fairly high-profile failures and over over the last decades and so so have a look at that corporate governance then what is it it is the system by which companies are directed and controlled so that is the system within the companies and the system outside the companies to make sure that they behave in a way which is functional and minimizes harm and damage so it's the system by which companies are controlled and why do we need it well if you've watched that video or if you do go to watch it you'll see financial human consequences of corporate failure so the commercial world is fraught with financial legal ethical pitfalls and good corporate governance hopefully stops things going wrong that's the point of it so that definition that had there actually comes and is a direct quote from the Cadbury committee of 1992 so worth worth learning it as with all these things worth having an accurate short memorized definition of any of the terms that we look at and the Cadbury committee also said in its report in 1992 that boards of directors are responsible for the governance of their company so it's worth you know if you haven't got that clear in your mind and we're talking obviously here about limited companies mostly public limited companies but huge companies and the directors who run the business are different from the shareholders who own it effectively but boards of directors as Cadbury points out in 99 two are responsible for the governance of their companies a little bit of background the Cadbury committee came after some huge high-profile corporate failures which had tremendous damage to public confidence in the commercial financial world in which pension funds have been raided people and been defrauded of their money all sorts of appalling Bebo it should have had very wide-ranging consequences so in order to try and increase confidence in the system and improve regulation stock exchange the natural reporting Council and the accountancy profession got together and set up the Calgary committee to say well what can we do and it's one of a series of committees which are mentioned in the CIMA guide you might want to look at looking at how regulation could be improved and fine-tuned because obviously there's a tension between allowing business in a freedom to make good decisions and then lots of money and regulating enough to make sure the disasters don't happen so the shareholders directors are responsible for governing the company and the shareholders role they appoint the directors and the auditors and they're supposed to make sure things are going properly because the shareholders clearly have the power to get rid of a board in extreme circumstances so the shareholders who own the company are not responsible for the day-to-day running of the company but they are responsible for the selection of the people who do the day-to-day running and for making sure they behave properly so responsibilities the board said can't preclude setting the strategic games providing leadership to make it happen and supervising this sort of day-to-day running of a thing and then reporting back to the shareholders about how they're doing that their stewardship of the company so that's how system that's working should work well that's what can't be said and obviously what the board does is subject to law so we know bit about the law there these are non-negotiable mandatory things they must do regulation that's usually set up by the particular professional community in which they work and it's slightly different from the law it's not going to be prosecuted by the state but regulatory bodies will companies to disciplinary action and find and penalty if they step outside the regulations that have been set down and of course ultimately the shareholders are there what they want and their regulation of the board's action they must be responsible to that at the annual meetings so what sort of things are companies behaving badly nice picture there of a very fat cat and of course huge fat cap salaries we're an issue back in the 90s remain an issue now the discrepancy between high levels of remuneration for directors of companies even where those companies seem to be losing people lower down the food chain lots of money and whether we've got that right is still a very contentious point in the commercial world some sort of that the behaviour that you'll seen mentioned in that laundering criminal money so money earned by people doing illegal activities running through company books buying property legitimizing ill-gotten gains pension funds where huge amounts of money are vulnerable to to plundering by unethical actors in the company well we've seen huge runs on pension funds and the difficulty there of course that has a an impact on thousands of people and very real impact on how how their lives are run where puncher pension funds are defrauded of money and we've seen some absolutely shocking misleading not just economical with the truth but outright lying fraud destruction of documents massive misreporting of company behaviors which have covered up bad behavior for and allowed it to accumulate huge impact and again some of that is referred to in that film if you do get time to just watch that on YouTube so of course that's led to the industry trying as I say to respond to that and find out how to stop it happening if at all possible so the Cadbury committee and the ones that follow it handful committee and they led to a combined governance code which is now since then become the corporate governance cult regulated by the financial reporting Council so that's the regulatory structure within which companies currently operate in the UK and it's good to be aware of that you don't need to know chapter and verse but have a look at it it's there's quite a lot about it in the SEMA book but you can get it online have a look at the sort of things it talks about the UK corporate governance code ok so obviously the there's a regulatory structure set up by people like the stock exchange the financial porting council the accountancy profession all of those people have an interest in how businesses run we need confidence in the system we want businesses to make money to employ people to to do things which make our lives prosperous and and healthy so who else has an interest in the running of a company got a list here of two kinds of stakeholders anyone who has an interest or is interested in the way a country company runs and its success is called a stakeholder so on the left there you've got financial stakeholders and what makes them financial stakeholders rather than interest stakeholders who the ones on the right is that if a company goes into financial trouble this lot stand to lose money so if you if your interest in a company's such that if it goes belly-up you lose you're a financial stakeholder so clearly if you're a shareholder in the business and it fails you lose your money anyone else who invests in that in a business so anyone who's loaned it money they stand to lose if the company fails clearly as do employees people who buy things and customers they may have given money for products which then don't arrive people who supply a business with good to make their products they have financially invested in a business and if things go wrong and they don't get paid they lose money and clearly wider society through the Majesty's Revenue and Customs so if you don't pay your tax Society loses out the government loses out so all of those on the Left there are people with a finance stake in the running of a company and on the right though we can spread the idea of a stakeholder even wider any one of these lists and it's not comprehensive by any means has an interest in the way a company runs so we see a lot written in the media about how companies run and they would argue they're a conduit for society's interest but they have they are those who have an interest in how companies run so do non-governmental organisations businesses may affect they work the way they work and the freedom they have to operate in the inner in an environment so non-governmental organizations activists people who lobby for change you work for charitable in charitable ways in in in the community all of these people have an interest in how business operates and they want it to operate in a proper fashion competitors clearly have an interest in how a company runs and they won't lose money in fact they're probably gain money if a company goes bust but they do have an interest in how company runs and what they're allowed to get away with and as we've seen the regulator's the stock exchange the auditing practices board the financial reporting Council all of these people have an interest in the running of a company so when you're thinking about corporate governance think about the wide list of people who have a potential interest in how a company is run so it's just a graphic illustration of that remember the shareholders are the people you own the company the board the directors are the people who run it and they sometimes come to blows so we've seen a little bit more shareholder activism in recent years used to be the case that shares might be distributed if you have a thousands of shares they might be held by thousands of different individuals but what we see now in the figures is that 60% of shares in public limited companies are actually owned by investment funds and insurance companies in the US and the UK and because the fund managers in those enterprises are obliged to manage those funds they take an active interest in the companies where they have significant share portfolios so we see lots more active engagement from shareholders and that's probably a good thing in terms of corporate governance and one thing where we've seen large groups of individual shareholders mobilized to some extent by social media is over the fat salary thing so again individuals have short shareholdings in companies like Marx as much we've got headline there of a Marks & Spencer story have organized themselves to protest annual meetings particularly about things like the high profile high salaries of chief executives when their shareholders are not getting paid dividends and they don't see the companies doing well so because the way executive remuneration is planned sometimes a great agreements that were reached in things and profit sharing and all sorts of deals I mean people seem to get paid huge salaries when things are going badly in the company and that of course leads to pressure from shareholders to make the Board of Directors accountable I think that's a bad thing but we've seen more of that shareholder activism and if you were to do a little bit research on that I'm sure you'd find other examples of your own that illustrate that point so relate company is a complicated business when it comes to call for a governance the law in a way is your starting point the law creates great pressure it's non-negotiable it's mandatory companies have to do it if they don't do it they found out they can be taken to court find all sorts of money and all sorts of problems can be caused so law puts pressure on them commercial pressure obviously they face they've got to succeed in the marketplace and of course that's sometimes why we see poor decision taken by government by boards of directors as they try and make a success of it by cutting corners so there's commercial pressure we have seen increasingly and we'll look at that in a separate video ethical pressure the profession wants you to behave ethically public perception society wants you to behave in a certain way and that creates it zone pressure governments have other things other than the law but they have other incentives and pressures that they bring to bear upon a company so the company running a company in keeping everyone happening and keeping all the pressures at bay is not an easy thing so thinking about the influences think about stakeholders think about the broad influences think about what's trying to be balanced and remember go back to the camp a committee definition the board is responsible for the ste direction for running the company and it's accountable to the shareholders who own it and in turn they have a responsibility to make sure the directors are doing a good job to appoint auditors and make sure things are being handled properly I just want to say a little bit about corporate social responsibility which is really in this context this is part of company's response to wider stakeholders so all stakeholders and we said before we were looking at those the wider sense of society's interest in companies one of the reasons they're interested is because companies have a big impact on the social economic environment that we all live in if you are making money and you don't care about how you pollute things if you are making money and you're building a big carbon footprint this has long-term consequences for all of us so there's been much more movement in recent times for businesses to respond to that corporate social agenda there's some cynicism about it so you may have heard of the term green wash our business is doing it because they really care about the environment or they really care about lobby groups what they think or are they doing it simply because if they don't they'll lose money but you don't have to be one or the other I think a company can respond to this agenda for genuine reasons but also because it's commercially sensible to do so because if they don't and we've seen boycott campaigns where businesses are not behaving in a way which society has decided is responsible being boycotted and therefore they'll lose money so look up for example Starbucks and what was perceived as a complete phase pay tax in this country led to a boycott of their shops and they then lose money so you have to behave in a way which is an ethical and response to shareholders or you will lose the business and then of course you'll be commercially unsuccessful but again why you do it is a mixture of reasons ok what happens when things go wrong that's where I started that's where I'll finish need if you like to be able to look for the signs and it's not easy because I have to say we started in 1992 with Cadbury committee but we continued there's a current inquiry in Parliament going in to look at corporate governance we still have big failures we still have the ethical failure of Volkswagen and it's polluting fuel emissions scandal all these things are difficult to achieve so what sort of things are going wrong if we're having poor corporate governance a single individual may dominate so they're all kind of sides of the same coin here if one individual becomes very powerful if it was originally a family business if the directors are people under his sway or her sway then that's a bad thing because corporations are big complex operations no individual knows everything there is to know any one individual dominating too much can be a sign of things going wrong if the board is just lacks about meeting if again I will allow a single individual to dominate if they just don't meet regularly enough they're not going to be keeping an eye on the strategic direction on how things are being done they're not going to be keeping tabs on whether accounts are misleading and things are being handled properly they may meet if they haven't got skills to understand the things put before them they may be unable to give enough control of a company so inadequate qualifications and skills amongst the board that also can be a sign of poor governance and lead to poor outcomes and within the business um people may have be given too much free rein so we've seen as a film about one particular rogue trader called Nick Leeson called rogue rogue trader the film where one individual allowed in a freedom to gamble huge sums brings down Bank and all the consequences of that so you need to supervise you need to give people freedom to exercise their judgment but you cannot devolve responsibility for supervision if the auditors lack rigor and we've sometimes see the failure to pick things up but we've also seen a complete accounting blind eye being deliberately turned to some very bad behavior in some of the corporate failures so we set up a system to make sure that everything goes through properly but it doesn't always work if the shareholders are not involved or the shareholders are not interested again that can be a symptom that things are going badly so short term view is adopted let's make a quick buck now we'll push the problem into the next financial year that can cause all sorts of problems and we saw similar things with Tesco recent years being fined for that sort of behavior so these are the sort of symptoms of poor corporate governance you need to be able to understand why we do it what it looks like if corporate governance is bad and the possible consequences of what happens and that's the sort of things we'll be asking you about finally just in this one let's just think about all of the things we've done on the module kind of tie together to tell you about business environment okay we begin with law and as I say law is non-negotiable it sets the framework which companies have to deal with they have to register with company house they have to have a memorandum of Association they have to have a certain number of Directors in the company secretary they have to meet so the law is laid down things they must do and if they don't do that you know they can be pursued by the state and the business can be in real trouble and end up wound up and then on the other hand we've talked to ethics now ethics is a much less well defined it's not about rules and things you must do it's about how you ought to behave and it's a sister voluntary set of codes not wholly voluntary of course as we've seen if you want to operate as an accountant you have to sign up to the code and in a way these you must do society expects you to behavior but it's not as men not mandatory in the same way that lorries and in the middle for companies is kind of corporate governance bridging and negotiating between the two some of it stuffs you've got to do some of it stuff you ought to do and it's the interaction of all these things is complicated to get hold of but we look at them as separate topics but actually when you get back out into the real world they all overlap and we've seen that a little bit and we'll probably you probably notice that if you watch the ethics video as well as the corporate governance one that there are some similar similarities and we look at similar situations where things have gone wrong to draw lessons for ourselves about ethics and about corporate governance okay thanks very much